Key changes in CARO 2020 applicable from 1 April 2020
The current COVID – 19 pandemic is not only affecting human health but also disrupting the economy at large. Public safety measures in place, though necessary are being a huge hit to the liquidity flow in the economy leading to grave issues such as unemployment, failing supply chain, sudden reduction in demand, unavailable inventories and so on.
The government is providing various relief measures and relaxations in order to boost businesses and the economy. In the same context the MCA has postponed the applicability of Companies (Auditor’s Report) Order, 2020 [CARO, 2020] from FY 2019-20 to FY 2020-21.
Brief Introduction to CARO:-
To enhance the scope of the audit, the MCAin consultation with the National Financial Reporting Authority (NFRA) released the CARO 2020. It lists out the subject matters on which the applicable companies are mandatorily required to report.
Let us understand the differences implemented in CARO 2020 from CARO 2016.
As far as applicability is concerned there are no changes in this criterion.
CARO 2020 shall apply to every company including a foreign company, except
- a banking company defined under Section 5(c) of Banking Regulation Act, 1949
- an insurance company defined under Section 2 of the Insurance Act, 1938
- company licensed to operate under section 8 of the Companies Act
- One Person Company defined under section 2(62) of the Companies Act, 2013 and a small company as defined under section 2(85) of the Companies Act, 2013
- a private limited company, not being a subsidiary or holding company of a public company, having
paid up capital and reserves and surplus <= Rs 1 crore (on balance sheet date)
total borrowings from any bank or FI <= Rs 1 crore (at any point during the FY)
total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations) <= Rs 10 crore (as per financial statements
Clause i – Reporting on Property Plant & Equipments (PPE) and Intangible assets
Changes w.r.t to CARO, 2016
- CARO 2020 has provided for separate reporting for PPE and Intangible assets whereas the previous Order had consolidated that both under fixed assets.
- Reporting on title deeds, where company is the lessee and where lease agreement is executed in favour of the assessee has been discontinued.
- Specific details are required where title deeds are not in name of the company.
New Clauses Inserted
- Specific reporting of revaluation of PPE is required
- Specific reporting on any proceedings initiated/pending against the Company for holding ‘benami property’ under Benami Transactions (Prohibition) Act, 1988
Clause ii – Reporting on Inventory
There have been noticeable changes in this clause. Initially, the auditor was only required to report whether physical verification of inventory has been conducted at reasonable intervals by the management and if any material discrepancies were noticed and if so, whether they have been properly dealt with in the books.
Now the Auditor has to also report on the following:-
- whether the coverage and procedure of physical verification by the management is appropriate or not
- whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books
- if during any point of time the company has sanctioned working capital limits exceeding Rs 5 crore, from banks or FI’s on the basis of security of current assets,
then the auditor is to verify whether quarterly returns/statements filed by the company with such banks or FI’s are in agreement with the books.
If the same are not in agreement, details of the same are to be furnished
Clause iii – Reporting on Loans, Investments, Guarantees, Securities & Advances in the nature of loans
Notable changes of clause 3 is that reporting has been extended to include loans, investments, guarantees, securities & advances in the nature of loans to any party where previously loans to partied under section 189 only, was covered.
New sub clauses inserted, cover the following:-
- whether the terms and conditions of the loans/ investments/ guarantees/ securities/ advances are not prejudicial to the company’s interest
- in respect of loans and advances in the nature of loans, whether the schedule of repayment of principal and interest has been stipulated and whether the repayments or receipts are regular
- additional reporting of loans and advances in the nature of loans renewed/extended or fresh loans granted to settle overdues of existing loans
- additional reporting of loans and advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment
- additional reporting of aggregate amount during the year and balance outstanding on the balance sheet date with respect to loans or advances and guarantees or security to subsidiaries, joint ventures and associates
There has been no change w.r.t Clause iv which pertains to Reporting on Compliance of Section 185 and 186
Clause v – Reporting on Deposits
Additional reporting on amounts which are deemed to be deposits is also added by CARO 2020 to remove ambiguity.
There has been no change w.r.t Clause vi which pertains to Reporting on Cost Records
Clause vii – Reporting on Statutory Dues
Just a drafting change to include Goods and Service Tax (GST) in the statutory dues and reporting of disputes of all statutory dues is included.
Clause viii – Reporting on Unrecorded Income
A new clause has been inserted in CARO 2020. Clause 8 requires auditors to report whether previously unrecorded income has been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961, has been properly recorded in the books during the year.
Clause ix – Reporting on Repayment and Usage Borrowings
Default of interest payment which was not covered previously, is now included
Additional reporting on the following, is required:-
- whether the company is a declared willful defaulter by any bank, FI or other lender
- if the loans were not applied for the purpose for which they were obtained, then the amount of loan diverted and the purpose for which it was diverted is to be disclosed
- if funds raised on short term basis have been utilised for long term purposes, then the nature and amount of the same is to be indicated
- details of funds borrowed by holding company for the purpose of discharging obligations of group entities is to be disclosed
- if loans are raised during the year on the pledge of securities held in its group companies, then details thereof are to be disclosed along with details of default if the company has defaulted in repayment of such loans
Clause x – Reporting on Use of Money Raised through Issue of own Shares
Additional requirements of Section 62 of Companies Act are to be complied with in case of preferential allotment or private placement of shares or convertible debentures.
Clause xi – Reporting on Fraud
Additional sub clauses have been inserted, which require reporting on:-
- whether any report under of section 143(12) of the Companies Act has been filed by the auditors in Form ADT-4 with the Central Government
- whether the auditor has considered whistle-blower complaints, if any, received during the year by the company
Clause xii – Reporting on Nidhi Company
Additional sub clause has been inserted, which requires reporting on default in payment of interest on deposits or repayment thereof for any period with details thereof.
There has been no change w.r.t Clause xiii which pertains to Reporting on Related Party Transactions
Clause xiv – Reporting on Internal Audit
A new clause has been inserted in CARO 2020. Clause 14 requires auditors to report whether:-
- the company has an internal audit system which is commensurable with the size and nature of its business
- the reports of the Internal Auditors for the period under audit were considered by the statutory auditor
There has been no change w.r.t Clause xv which pertains to Reporting on Non cash transactions with Directors
Clause xvi – Reporting on Registration u/s 45 IA of RBI Act
Additional sub clauses have been inserted, which require reporting on:-
- whether non banking financial activities or housing finance activities are conducted without a valid Certificate of Registration from the RBI
- whether the company being a Core Investment Company (CIC), fulfills the classification criteria laid down by RBI
- if the group has more than one CIC as part of the Group, then the number of CICs which are part of the Group are to be disclosed
Clause xvii – Reporting on Cash Losses
A new clause has been inserted in CARO 2020.
Clause xvii requires auditors to report whether the company has incurred cash losses in the financial year and in the immediately preceding financial year and if so, the amount of cash losses is to be disclosed.
Clause xviii – Reporting on Auditor’s Resignation
A new clause has been inserted in CARO 2020, which requires reporting on:-
- resignation of the statutory auditors during the year, if any
- whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors
Clause xix – Reporting on Financial Position
A new clause has been inserted in CARO 2020, which requires the auditor to report on whether material uncertainty exists or not. Disclosure is required that the auditor is on the opinion that the company is capable of meeting its liabilities existing on the balance sheet date as and when they fall due within a period of one year from the balance sheet date.
Clause xx – Reporting on CSR Compliance
A new clause has been inserted in CARO 2020, which requires the auditor to report on whether unspent CSR amount has been transferred to:-
- a fund as specified in Schedule VII (where no specific project has been carried out or assigned)
2. a special designated bank account (related to any ongoing project)
Clause xxi – Reporting on Consolidated Financial Statements (CFS)
The order was previously not applicable to the auditor’s report on consolidated financial statements.
However according to CARO 2020, disclosure is required on whether there has been any qualifications or adverse remarks by the respective auditors in the CARO reports of the companies included in the consolidated financial statements, if yes, the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks are to be indicated.
Reporting on Managerial Remuneration has been deleted in CARO 2020 in order to avoid duplication as the same is already covered in the Main Audit Report.
In conclusion we would like to say that reporting expectations from the auditor are expanding significantly. Hoping this would lead to more transparency between the company and stakeholders and hence the auditor needs to ensure that he is more perspective and skeptical while discharging his duties.